The Federal Reserve policy meeting on Wednesday was the highlight last week, with the Fed as broadly expected delivering a 25bp rate cut – the first cut in over a decade. While Chairperson Powell left the door ajar to another rate cut, he fell well short of telegraphing the likelihood let alone timing of another cut and markets initially cut their pricing of further rate cuts before year-end to just 25bp.
However, on Thursday US President Trump announced that a new 10% tariff on $300bn of imports from China would take effect on 1st September. Trump signalled that these tariffs could be hiked further and Chinese officials responded with a threat of similar tariffs on imports from the US. Reports over the weekend suggest that China could halt trade negotiations with the US altogether and USD/CNY has broken through the psychologically important level of 7.00.
The risk to US and global economic growth has seen Wednesday’s post-FOMC meeting rates price action more than reversed, with markets now pricing 60bp of Fed rate cuts before end-2019, and US and global equities have come under pressure. Nevertheless the Dollar trade weighted index has managed to slowly appreciate to its strongest level since mid-December.
EUR & CHF
The Euro has also managed to rise to a 5-week high but the main beneficiary of global risk aversion, perhaps unsurprisingly, has been the safe-haven Swiss Franc which has appreciated 1.7% in the past week alone to a multi-year high. The USD/CHF cross is down to a 5-week low of 0.977.
AUD & NZD
Conversely, the more risk-sensitive Australian Dollar has weakened almost 3% in the past three weeks, with the Australian economy vulnerable to a slowdown in Chinese economic growth. The Kiwi Dollar trade weighted index has been broadly stable in the past two sessions, with all eyes on the RBNZ’s policy meeting on Wednesday, but is still down 2% since 22nd July.
GBP
Sterling was under acute pressure early last week, with markets seemingly pricing in a rising probability that the UK could exit the EU without a deal on 31st October. Prime Minister Johnson and senior cabinet members are standing behind their commitment to take the UK out of the EU and it remains unclear whether Parliament, where the ruling Conservative Party-DUP alliance only has a working majority of one seat, could stop such a scenario. Sterling stabilised in the second half of the week but the GBP/USD and GBP/EUR crosses have once again come under pressure today, falling to 1.21 and below 1.09, respectively.
